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Culture Documents
Chapter 1
Chapter 1
INTRODUCTION TO ACCOUNTING
Content Standard:
Performance Standard
The learners shall be able to cite specific examples in which accounting is used in
making business decisions
Learning Competency/ Code
The learners…
1. Define accounting- ABM_FABM11- IIIa-1
2. Describe the nature of accounting- ABM_FABM11- IIIa-2
3. Explain the functions of accounting in business- ABM_FABM11- IIIa-3
4. Narrate the history/origin of accounting- ABM_FABM11- IIIa-4
LEARNING OUTCOMES
L.O. 1 Understand basic types, goals, and implications of financial management.
L.O. 2 Identify the legal forms of business.
L.O. 3 Know the foundation of finance.
DISCUSSION PROPER
1 INTRODUCTION:
Accounting is a system meant for measuring business activities, processing of
information into reports and making it available to decision-makers. The basis for the
recording of transactions are called source documents. Financial reports are prepared
to communicate the performance of an organization in monetary terms. That is why,
accounting is considered as the Language of Business. However, a business may have a
lot of aspects which may not be of financial nature.
The Language of Financial Decisions. The better the understanding of the language, the
better is the management of financial aspects of living. Many aspects of our lives are
based on accounting, personal financial planning, investments, income-tax, loans, etc.
We have different roles to perform in life-the role of a student, of a family head, of a
manager, of an investor, etc. The knowledge of accounting is an added advantage in
performing different roles. However, we shall limit our scope of discussion to a business
organization and the various financial aspects of such an organization. When we focus
our thoughts on a business organization, many questions (is our business profitable,
should a new product line be introduced, are the sales sufficient, etc.) strike our mind.
To answer questions of such nature, we need to have information generated through
the accounting process. The people who take policy decisions and frame business plans
use such information. All business organizations work in an ever-changing dynamic
environment. Any new program of the organization or of its competitor will affect the
business. Accounting serves as an effective tool for measuring the financial pulse rate of
the company. It is a continuous cycle of measurement of results and reporting of results
to decision makers.
Just like arithmetic is a procedural element of mathematics, book keeping is the
procedural element of accounting.
Figure 1 shows how an accounting system operates in business and how the flow of
information occurs.
B us i ne s s tra ns a c ti ons oc c ur
R e p o rt s a re p r e p a r e d t o s h o w re s ul ts
of bus i nes s ope ra ti on
LESSON 1: DEFINITION
Accounting Defined
Technical definitions of accounting have been published by different accounting
bodies. The American Institute of Certified Public Accountants (AICPA) defines
accounting as:
the art of recording, classifying, and summarizing in a significant manner and in terms of
money, transactions and events which are, in part at least of financial character, and
interpreting the results thereof.
Accounting is considered an art because it requires the use of skills and creative
judgment. One has to be trained in this discipline to be able to perform accounting
functions well.
They are assigned amounts when processed in an accounting system. Using one
of the examples above, it is not enough to record that the company paid salaries for
April. It must include monetary figures – say for example, Php20, 000 salaries expense.
Accounting has got a very wide scope and area of application. Its use is not
confined to the business world alone, but spread over in all the spheres of the society
and in all professions. Now-a-days, in any social institution or professional activity,
whether that is profit earning or not, financial transactions must take place. So there
arises the need for recording and summarizing these transactions when they occur and
the necessity of finding out the net result of the same after the expiry of a certain fixed
period. Besides, there is also the need for interpretation and communication of
those information to the appropriate persons. Only accounting use can help overcome
these problems.
In the modern world, accounting system is practiced not only in all the
business institutions but also in many non-trading institutions like Schools, Colleges,
Hospitals, etc. and also Government Accounting methods are used by all who are
involved in a series of financial transactions.
The scope of accounting as it was in earlier days has undergone lots of changes
in recent times. As accounting is a dynamic subject, its scope and area of operation have
been always increasing keeping pace with the changes in socio-economic changes. As a
result of continuous research in this field the new areas of application of accounting
principles and policies are emerged. National accounting, human resources accounting
and social Accounting are examples of the new areas of application of accounting
systems.
3. Accounting is means and not an end: Accounting finds out the financial results
and position of an entity and the same time, it communicates this information to its
users. The users then take their own decisions on the basis of such information. So, it
can be said that mere keeping of accounts can be the primary objective of any person
or entity. On the other hand, the main objective may be identified as taking
decisions on the basis of financial information supplied by accounting. Thus,
accounting itself is not an objective, it helps attaining a specific objective. So it is
said the accounting is ‘a means to an end’ and it is not ‘an end in itself.’
CHAPTER SUMMARY: